The Central Bank of the United States
The Fed as it is sometimes called, has 12 districts across the country with each district housing a regional bank. The Board of Governors (or Federal Reserve Board) is located in Washington DC.
Their mission is to keep inflation low and productivity high. The Fed has a dual mandate of both price stability and maximum employment.
The main policy making body in the Federal Reserve is the Federal Open Market Committee. It comprises of 5 of the 12 presidents of the 12 district branches (on a rotating basis) and 7 governors from the Reserve Board. The head of the FOMC is Fed Chairman Ben Bernanke.
The FOMC meets 8 times a year to decide on interest rates – the main lever used by the Fed to impact inflation and the economy.
The Fed has lots of ways to expand credit in the economy and since the financial crisis has had to expand its balance sheet to take a lot of the toxic loans that were in the US banking system. This helped take a huge burden off US banks but it passed all the losses on to the central bank and the taxpayer.
Here’s a look at US debt since the financial crisis:
A big chunk of that added balance sheet was the purchase of Mortgage Backed Securities (MBS) which were the bad loans (sub-prime mortgages) strewn throughout the US financial system.
The Fed now has to content with an economy where unemployment soared to close to 10% and stubbornly stood there in the wake of the past recession.
March 2011
Prices have not been as big a problem, as the fear was that the economy could face a spell of deflation.
Feb 2011
The Fed has therefore used ultra loose monetary policy, dropping interest rates to just above 0%, something something called “ZIRP” or zero interest rate policy.
The Fed has also undertaken quantitative easing which is buying longer term Treasuries in an attempt to inject more liquidity into the market and help lower longer term interest rates (yields).
This policy has been successful in that equities have stabilizing and managed to regain most of the losses from the 2007 crash and the economy is now growing again. But, quantitative easing hurts the US money – with the US Dollar pressured in the currency markets as a result.
